Three Ways Electronic Components Manufacturers Can Profitably Manage Rising Costs
By Zilliant
Jul 26, 2022
Table of Contents
As costs continue to rise and supply shortages persist, dynamic pricing is now a requirement for electronic components manufacturers. Here are three ways to make dynamic pricing a reality in this industry.
Dynamic Pricing Can Manage Dramatic Cost Increases
The semiconductor shortage in the global market has reached crisis levels, pushing lead times up to nearly a year. Indeed, ripple effects have been felt throughout the consumer electronics, automotive, aerospace and many other industries that increasingly depend on chips. However, the trouble doesn’t end at microchips and semiconductors. A look deeper into the value chain reveals more shortages that are creating fewer headlines, but just as many headaches for electronic components manufacturers. Many of the raw materials that go into electronic components have been in short supply due to mining labor shortages caused by the pandemic.
The combination of short supply and rising cost for materials like petroleum, copper, silicon, cobalt, gold, and many others have led electronic components manufacturers to raise their prices by 5% to 200% depending on the product.
With prices on the rise throughout the value chain, the time to act is now. As EPSNews puts it:
“Electronics prices are on track to rise this year – and it may not be until late 2023 before prices begin to fall. Manufacturers can prepare now to manage upcoming electronics price increases, continuing shortages and longer-than-average lead times on important electronic components and raw materials.”
But these manufacturers must ask themselves, “Are we equipped with the tools that will help us prepare now with the decisiveness and precision required?” Most risk margin loss when they play the cost pass-through game with outdated tools. When costs need to be passed through and prices need to be raised at such a rapid pace, there is no room for guesswork or manual calculation. Additionally, when costs eventually decline, manufacturers must carefully parachute prices down in order to preserve margins while remaining competitive. These intricate, yet accelerated, price moves require dynamic pricing software.
Why is Dynamic Pricing Required for Electronic Components Manufacturers?
Research firm Global Data found that “more tech companies mentioned ‘pricing’ during their Q1 earnings calls than any other sector… discussions about pricing grew by more than 65 percent compared with the same quarter last year.”
This is because not only are raw materials and chips in high-demand/short-supply, but the cost to move these goods around the world has greatly increased. When cost becomes the dominant pricing trigger, meaning an event that necessitates a price change, prices must follow, of course. But at a strategic level, the pricing response to ballooning costs also represents the biggest opportunity for businesses to take control of a seemingly out-of-control situation. Hence, it’s at the tip of everyone’s tongue, all the way up to the boardroom.
Yet when these strategic pricing discussions take place and decisions are made at the highest levels, the cruel reality of outdated systems often stops any forward momentum. Most enterprises are still fighting 21st century battles with 20th century tools – spreadsheets and inflexible pricing systems of record.
These systems are not designed for the volume or speed of the digital economy, especially not in times of inflationary pressure. Cutting-edge electronic components manufacturers are adopting modern pricing approaches and tools because they allow them to execute the following three strategies to thrive through inflation and beyond.
Read more: What is Dynamic Pricing?
Three Ways Electronic Components Manufacturers Can Beat Rising Costs
Dynamic Cost Updates
“When costs change, how quickly can we change pricing?” This is the type of question pricing professionals will receive often from executive management. It’s not uncommon for manufacturers to receive as many as 10,000 cost changes per month, each of which impacts scores of customers. Before list, matrix, negotiated or customer-specific prices can be updated, a thorough accounting of vendor cost changes must be done. Manual approaches to updating cost data – often calculated in large spreadsheets and slowly loaded into an ERP system – introduce errors, take up precious time and are unnecessarily complex. Customer-specific pricing can be one of the toughest types of pricing to update – many agreements are locked away in disparate systems making it impossible to get a clear view of how many agreements need to be updated. As a result, customer agreements can be a significant source of margin loss.
Getting Dynamic
A modern pricing system of management like Zilliant Price Manager™ can automatically ingest vendor cost updates, calculate price changes, and feed new prices into Zilliant Deal Manager™, which is used by sales reps to manage customer agreements. Sellers can adjust or override suggested prices, within reason, and justify new customer-specific prices with ease. The time and effort behind cost-influenced changes is significantly reduced, while sales and pricing teams work together to protect margins and prevent price decay.
Dynamic Competitive Response
Another major boardroom consideration is how competitors are responding to rising costs. Are they beating us to the punch with price increases and taking margin share? Are they strategically holding price in certain areas while making up for it elsewhere? Are our online price updates lagging behind others in the industry? In the cutthroat world of electronic components, any misstep in competitive positioning is highly damaging. Competitive analysis and price response is a data-heavy exercise, one that is only getting more intensive as new online competitors emerge in the marketplace. For most, the status quo approach to countering competitive moves is often executed too slowly – even when it’s done on a weekly basis – to be meaningful with legacy tools.
Getting Dynamic
An automated approach to competitive price moves is required. Multiple times per day, competitor prices can be fed into Price Manager™ via API, where they are aggregated, filtered through pre-defined rules, and calculated into a new price. Updated prices are then quickly published to eCommerce, CPQ, CRM, or any other commercial system via Real-Time Pricing Engine™. This exponential improvement in response speed leaves more time to test and hone strategies, while winning more deals at the right price.
Augment ERP to Deliver Dynamic Deal Guidance
Legacy ERP systems, when used as systems of record for pricing, are constrained in many ways. One of those constraints is the ability to quickly provide guidance at the deal level. Deal desks within electronic components manufacturers are left to manage hundreds or thousands of deals per day, which then go through a complex manual approval process.
Getting Dynamic
One manufacturer recently sought to solve this problem and called on Zilliant to help. It wanted to deliver start/target/floor deal guidance directly into its quoting system to give its sales reps pre-approved discount windows. However, its ERP system wasn’t equipped to handle this task. Rather than storing deal guidance in ERP, the manufacturer leveraged the Real-Time Pricing Engine™ to make external callouts for deal guidance. This reduced the costs associated with delivering deal guidance, updated prices in real-time, and allows new strategies to be tested without IT involvement or ERP manipulation.
